Barclays Tells Clients To Buy Pound, Sell Yen

May 06, 2010

Never mind uncertainty surrounding the
U.K. election. Barclays Wealth is telling clients to buy the pound and sell the yen, and ETFs look, yet again, like they’re the easiest way to get some skin in the ‘forex’ game.

Barclays Wealth, the investment advisory arm of U.K.-based Barclays Plc, is telling clients to buy British pounds and sell Japanese yen, arguing that any new U.K. government following today’s general election is likely to avert inflation, while the yen will be hurt by rising global interest rates and commodity prices.

“We therefore recommend clients establish long positions in sterling against the Japanese yen,” the firm said in a press release. While investors could seek the investment exposure Barclays is calling for in actual currency or futures markets, ETFs may well be the most efficient way, traders said.

Barclays noted that even though the pound has been weak due in part to uncertainty surrounding today’s general election in
Britain, the currency’s prospects could move higher quickly should the polling end with a clear outcome. Incumbent Prime Minister Gordon Brown of the Labour Party faces the Conservative Party’s David Cameron and a third candidate, Nick Clegg, of the Liberal Democrat Party.

“While sterling could fall further in the immediate aftermath of the election, particularly if the outcome is indecisive, we expect the currency to move higher in the ensuing six months. The reason we are recommending the currency at this time is that in the event of a clear and positive election outcome, sterling could move higher quickly,” Barclays Wealth Investment Strategist, Brian Nick, said in the statement.

Results of the British election won’t be available until as late as midnight in the
U.K., or about 6 p.m. EDT. The British Parliament was dissolved April 12, making the election possible.

Ways To Play It

Two Rydex ETFs loom as probably the more cost-effective to play the Barclays recommendation: the CurrencyShares British Pound Sterling Trust (NYSEArca: FXB) and the CurrencyShares Japanese Yen Trust (NYSEArca: FXY). Both are based on crosses with the dollar.

“The dollar value in those two trades is going to be washed out, because you’re going long-pound vs. short-dollar; and you’re going short-pound vs. long-dollar,” said one ETF trader, who spoke to on condition of anonymity. “So the dollar exposure is next to nothing, and you’re left with the exposure you’re looking for.”

Underlying options of FXY and FXB are another way to play the trade, as are currency options listed on the Philadelphia Stock Exchange, the trader said, adding that shorter-term, tactical exposure largely eliminates the extent to which management fees or tracking errors could eat into ETF returns. Both CurrencyShares products have 0.40 percent annual management fees.

Also, the ProShares UltraShort Yen ETF (NYSEArca: YCS) offers investors double the yen’s losses against the dollar. But, because it compounds returns daily, it and “leveraged” securities like it are considered to be appropriate only for sophisticated traders who grasp the complexities of the returns. ProShares, the world’s biggest purveyor of leveraged ETFs, charges 0.95 percent a year on all its products.

Another exchange-traded product investors could employ to gain long pound exposure is the iPath GBP/USD Exchange Rate ETN (NYSEArca: GBB), though the trader cautioned that it’s not a terribly liquid security, which means it doesn’t have much of the tradability that makes so many ETFs attractive.

What ETNs do have going for them is that they don’t have tracking error. They are essentially debt instruments that deliver the underlying returns of the strategy, minus management fees. The catch is that returns depend entirely on the good faith and credit of their issuer; in this case, Barclays. The ETN, “GBB,” costs investors 0.40 percent a year.


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